Investment bank cull won’t protect survivors’ pay

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By Margaret DoyleThe author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Bankers who escape the summer cull won’t escape the pain. While they will get a bigger share of the bonus pie for this year, it seems clear that the pie itself, and their slice of it, will be much smaller.

Barclays Capital, Credit Suisse, Goldman Sachs, Nomura and UBS are among those cutting jobs. But the pace of headcount reduction has lagged recent revenue falls. Since the cuts began, markets have deteriorated further.

Take BarCap. It’s cutting around 6 percent of jobs. But its revenue was 12 percent lower in the second quarter than the preceding three months in dollar terms. BarCap’s revenue will be 10 percent lower over the whole year, Morgan Stanley analysts predict. Credit Suisse is cutting up to 7 percent of investment bank jobs. But the Swiss firm’s investment banking revenue for the year will be 14 percent below 2010 levels, Morgan Stanley estimates. The pattern is likely to be similar across the industry.

Of course, investment banks could try to cut other expenses to safeguard pay. But many already have cost saving programmes underway and it’s not clear how much else there is to go for. Moreover, with banker pay by far the biggest expense, there is a limit to the impact these initiatives can have.

Individual pay will fall unless banks opt to shell out a higher proportion of their dwindling revenues in bonuses. With regulators and shareholders making competing demands on bank cash, this so-called compensation ratio of pay to revenue won’t be easy to lift.

True, banks have been brazen before. In 2008, for example, the comp ratio jumped from 42 percent to 58 percent, according to consultants Oliver Wyman. Despite massive losses and huge taxpayer bailouts, bank bosses chose to keep staff happy. The measure has since ticked down to around 35 percent.

But banks would struggle to pull off the same trick again. Regulators are insisting that they hoard capital. Low dividend income has disenchanted investors who are also nursing big share price losses. Regulatory reform has left investors sceptical about whether the sector can make decent returns on equity and many banks trade below book value.

With these sorts of pressures, only the most foolhardy of bosses would give the staff a bigger slice of the shrunken pie.

Author Profile

Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council.